5/19/2009 @ 6:20PM

Shunning NASDAQ

An old Wall Street joke posits that the New York Stock Exchange is saving the tickers “I” and “M”–two of the seven unused single-letter slugs–just in case
Intel
and
Microsoft
want to jump ship from the NASDAQ.

Judging by the experience of Array Networks, one of the few technology companies to go public recently, the NYSE might be holding them for a long time: Today’s market defectors could be heading to China, or at least as close to the country as possible.

Array Networks is a Silicon Valley hardware company that sells devices that encrypt network traffic. When Chief Executive Michael Zhao thought the security vendor was ready for an initial public offering, his research didn’t point to New York, but to Taipei. Last Wednesday, the company became the first U.S. company to debut on the Taiwan Stock Exchange.

“We did our research and the three finalists were Taiwan, mainland China and NASDAQ,” Zhao says.

The IPO was modest in size, according to the Gre Tai Securities Market, which provides information about the Taiwan exchange. Milpitas, Calif.-based Array issued about 54 million shares valued at around $79 million. On its first day of trading, the stock opened at NT$15, about 46 cents, and closed at NT$40, or $1.22. Array is now trading at NT$39, or $1.19 a share, with a volume of 16,000 shares traded.

Array has 200 employees in China, and, according to consulting firm Frost & Sullivan, the company had 43% market share there in 2007 for its principal product category, SSL VPN devices. That would make mainland China “a natural choice” for an IPO, says Zhao. “However, China does not allow foreign companies to be listed.”

But Taiwan does. Last year the country eased listing requirements to make its market more international and technology-focused. As part of that plan, the country loosened listing restrictions that prohibited companies with more than 20% shares owned by mainland Chinese investors.

So after politics, Zhao says the decision between NASDAQ and the Taiwan exchange was a matter of incentives. Taiwan won.

Much of those incentives were geographic. In general, Asia is a major market for Array Networks, which sells devices that encrypt network traffic, contributing some 70% of the company’s total revenues. But it’s also about as close to Chinese investors as a U.S.-based company can get.

Array’s two largest shareholders–H&Q Asia Pacific and the venture arm of the Industrial Technology Research Institute–both have strong ties in Taiwan. H&Q Asia Pacific was the first real venture capital company in Taiwan, investing in computer maker Acer, D-Link and others. The venture arm of Industrial Technology Research Institute is sponsored by the Taiwanese government to promote innovation in industrial technologies.

Some of the incentives for Array to trade on the Taiwan exchange were financial. Zhao won’t disclose the total cost of listing in Taiwan but estimates it was one third to one half the cost of listing on NASDAQ.

IPOScoop.com founder John Fitzgibbon says more U.S. companies should take note of Array’s decision to list abroad as regulatory costs make U.S. markets less competitive. “Between that, accountants and legal fees, it runs into $2 [million] to $3 million dollars,” Fitzgibbon says.

He also notes that it seems natural for a Silicon Valley company with Asian interests to opt out of a U.S. IPO. “They found a place for it, it’s a hell of a lot less expensive and they raised the capital,” Fitzgibbon says. “What do they care where the stock is traded?”